Core Financial Values

Strategic Defaults

Posted on Wednesday, October 13, 2010

At first blush it sounds better than winning the lottery: You get the cash up front and you don’t even have to buy a ticket to play! But strategically defaulting. In fact there are sound financial, legal, and ethical reasons to stay put.
For example, paying rent years before being able to buy again is arguably an even worse ‘investment’ than paying down an underwater mortgage, especially after factoring in the mortgage interest and other tax benefits. Costs associated with buying again in the future also need to be factored in. Ditto the higher future interest rate which will likely be paid on new mortgages once the Feds no longer need to keep rates down.
Not to mention the average 350 point hit to your credit score and the impact that will have on . Especially for those who already have poor credit, this can have a devastating impact on car, credit cards, cell phone and other credit-score dependant expenses. Foreclosures stay on credit reports for seven years, a long time to be denied pay higher rates. Fannie Mae makes strategic defaulters wait seven years before allowing a new mortgage, verses only two or four years for short sale or deed-in-lieu of foreclosure.
In recourse states (where lenders can pursue borrowers for the difference between the amount they recover from the sale of the home and the amount of the mortgage, also known as a ‘deficiency’) like Florida, lenders have five years to get deficiency judgment and twenty to collect. Many lenders are doing just that, hiring aggressive collections firms or selling judgments. Experts call deficiency judgments ‘ticking financial time bombs.’
Strategic defaults leaves municipalities footing lawn maintenance bills, neighbors facing blighted homes reduced property values, and everyone paying higher borrowing costs and for FDIC, Fannie Mae, Freddie Mac and FHA losses. It perpetuates the cycle of ‘adverse feedback’ as folks are more likely to strategically default if they know someone else who did. As of March 2010, a whopping third of defaults were thought to be strategic. Finally, strategic defaults prevent folks truly in need of help and sympathy from getting it. Any position short of is rife with dangerous rationalization.


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